Canada-US Tax Treaty Overview

The US-Canada tax treaty, also known as the Canada-United States Income Tax Convention, is an agreement between the governments of Canada and the United States that is designed to prevent double taxation and promote trade and investment between the two countries.

The purpose of the treaty is to ensure that individuals and companies who earn income in both Canada and the United States are not subject to double taxation on that income. This is achieved by providing rules for determining which country has the right to tax specific types of income, and by providing mechanisms for resolving disputes between the tax authorities of the two countries.

The treaty covers a wide range of issues related to taxation, including rules for determining residency status, rules for the taxation of employment income, business income, and investment income, and rules for the taxation of gains from the sale of property.

One of the key benefits of the US-Canada tax treaty is that it provides a mechanism for reducing the withholding tax rates on cross-border payments of dividends, interest, and royalties. This helps to reduce the tax burden on individuals and companies who do business across the US-Canada border, and promotes trade and investment between the two countries.

For Canadian investors, some of the most important aspects of the Canada-US tax treaty to consider include:

Residency Rules: The treaty provides rules for determining which country an individual is considered a tax resident of. This is important because residents of both countries are subject to taxation on their worldwide income. The rules can be complex, but generally, an individual is considered a resident of the country where they have a permanent home and closer personal and economic ties.

Withholding Taxes: The treaty provides rules for reducing the withholding tax rates on cross-border payments of dividends, interest, and royalties. For example, the treaty limits the withholding tax rate on dividends paid to a Canadian resident from a US company to 15% (compared to the normal rate of 30%). This can be important for Canadian investors who hold US investments in their portfolio.

Capital Gains: The treaty provides rules for the taxation of capital gains on the sale of property. Generally, gains from the sale of real property (such as land and buildings) are taxed in the country where the property is located, while gains from the sale of other property (such as stocks and bonds) are taxed in the country where the seller is a tax resident.

Retirement Savings: The treaty provides rules for the taxation of retirement savings. For example, if a Canadian resident withdraws funds from a US Individual Retirement Account (IRA), the withdrawal will be subject to US tax, but the tax paid can be credited against the investor’s Canadian tax liability.

Minimizing Double Taxation: The treaty provides rules for determining which country has the right to tax specific types of income. Canadian investors can use these rules to minimize double taxation by ensuring that they are only paying tax on their income in one country and by claiming foreign tax credits on their Canadian tax return for any taxes paid to the US.

Avoiding US Estate Tax: The US has an estate tax that applies to the value of assets owned by an individual at the time of their death. The Canada-US tax treaty provides rules for Canadian residents to avoid or minimize US estate tax by claiming a credit for any Canadian estate tax paid.

There are many strategies investors may use that relate to the US-Canada tax treaty. Many of these strategies are implemented using a combination of tax, legal, and investment advice. What our family office does to help our clients in these situations is co-ordinate the advice of various professionals to create and document plans. Please contact us to learn more about how our cross border tax experience may benefit your financial plans.